Understanding Your Inventory Holding Cost
Over 90% of the time when working with our customers, the concern around how to handle Inventory is often spoken about at the last minute before things are final. We have found Inventory Holding Costs are misunderstood by a wide margin in a lot of the Paper industry.
There are a number of cost drivers in holding inventory and sometime even more important, the cost of not having enough inventory on hand. Below we put together the facts around this calculation.
Each company is different but on average your inventory holding cost will be anywhere from 25% to 40% on the inventory value on hand. If you have $500,000 in inventory your yearly inventory cost will range from $125,000-$200,000. Most companies settle in the range of30%-35% a year. With this being said, companies will apply a standard 3% “monthly” holding cost. Below is a quick example of what these numbers would look like with an inventory value of $500,000. The yearly cost of Inventory comes to $190,000.
Keep in mind these are averages. It is key that you track your own inventory costs. This is where most companies fall down on. Tracking these costs (see below) is time consuming, requires all levels of management buy in and is often not the most glamorous of work. Every company should make an attempt at completing these costs. We have heard feedback from customers on how eye opening the process was in the fact that they just had no idea they were spending that amount of money on a particular cost. If you were thinking of taking on a summer project, this is your time to hire that intern and make this one happen.
Actual Inventory Cost Categories
Here is the list of costs that go into figuring out your Inventory Costs.
|Monthly Value of Inventory||$500,000.00|
|Inventory Holding Costs||% Cost||Total|
|Cost of Capital||5%||$25,000|
|Obsolete & Outdated Inventory||3%||$15,000|
|Total Yearly Inventory Holding Costs||38%||$190,000|
This example will be different for your company no doubt. The point is we want to help you to start thinking about these real costs. The benefit of investing in this exercise can be significant cost savings that will drop to your bottom line. Everyone has a cost of inventory – do you know what yours is?